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When it comes to communicating with investors, you’d think U.S. firms have lots of advantages. English is the native language of the small army of legal, accounting, and PR pros these companies hire to produce and polish their communications. Plus, investors are likely to start out more familiar with the company, the sector and standard accounting and reporting practices. So you’d expect American companies to be worldwide leaders in clarity of communications, right?

Nope, says the empirical evidence. A new study out of the University of British Columbia’s Sauder School of Business, which is set to be published in The Accounting Review, examined annual reports and earnings press releases from a variety of global businesses using a long-established measure of clarity called the FOG index. Basically, it looks at sentence complexity and word length and determines what level of sophistication a reader needs to really understand a document.

Confused (Photo credit: CollegeDegrees360)

What did the researchers find? "We discovered that foreign firms work harder to write clearer text and present more numerical data than their U.S. counterparts,” study co-author Russell Lundholm reports in the release.

What’s Up With That?

Why are U.S. firms more likely to write impenetrable prose than their foreign competitors? The research team thinks the effect is down to investor bias against firms that are not only physically distant from the U.S. but may also have different accounting practices and investor protections. Basically, firms that are further from the U.S. both geographically and in terms of difference in their practices need to work harder to win the trust of U.S. investors.

"It’s related to the ‘home bias' problem. For a variety of reasons, investors have a bias against firms outside their home country, which makes them less willing to hold their stock. The bias increases with the distance between the investor and the firm. For instance, US investors are pretty happy to hold Canadian stock, but less inclined to hold UK stock, and even less inclined to hold Australian stock. Now flip it around and look at it from the point of view of the firm. If you’re in Australia and want to attract U.S. investors, you have to go the extra mile," Lundholm explained in an interview.

"The further the firm is from the investor, the more effort the firm puts in. That’s true whether it’s a regulatory statement, and MD&A disclosure, or a press release," he concluded.

Does All That Effort Pay Off?

Indeed, it does. This effort to clearly communicate performance does pay off for foreign firms, the research revealed. "Firms that provide more readable disclosures have more institutional investors," said Lundholm. "We compared companies within the same country — two firms inside South Africa, for instance — and the one that provides the more readable disclosure got more institutional investors."

So Are U.S. Firms Just Slacking?

One could look at this conclusion and wonder if American firms are simply coasting when it comes to communication. But Lundholm insists their relative lack of effort isn’t just down to laziness, but reflects sensible business tradeoffs. In other words, why put in the extra effort on communications if you don’t have to? Wouldn’t that energy put to better use elsewhere in your business?

"Clarity of these statements has to exist in an equilibrium with all the other things a company has to get done," Lundholm notes.